Contracts: Why we Need them and How to Create Profits from Paperwork

In most developed economies, any major deal will be formalized in a written document, specifying the terms of the deal in a legally binding manner. This serves multiple purposes, such as the creation of obligations and rights for contractual parties, and the formalization of the business relationship. However, beyond this, many people may be unaware of the benefits and cost savings well structured contracts can bring the parties involved. We attempt to outline these below:

Structuring Your Business and Securing Your Returns

At the start of a business deal, performance and market conditions may be unpredictable. However, oftentimes, prices and returns can be locked into contract, to ensure a certain degree of profitability and resource allocation. Many contracts will specify termination fees, and require parties to make certain warranties of service. In addition, some contracts may also require guarantees or a guarantor, and the disclosure of asset/net value for the sake of due diligence. The sum of all these measures is to ensure profitability, reliability and a well structured, and stable return on the investment a party is placing in the venture.

These contracts will also be evaluated by Contract Lawyers for enforceability. Issues which would arise at this stage of the analysis would relate to the applicability of local laws in the jurisdiction where the contract is to be enforced. This is particularly important for global businesses and multinationals. For example, questions such as where the contracting party maintains its headquarters and principle locations of business will need to be answered. In addition, local commercial and contractual laws will need to be understood. In the GCC and Gulf region, taking the UAE as an example, a major part of all contractual disputes litigated via the court system is based on written submissions before the court, citing clear and documented evidence. Therefore, having a strongly worded and clearly documented commercial agreement is crucial to ensuring the enforceability of your agreement. During arbitration, and in jurisdictions which rely more heavily on oral advocacy, such as the United States, Canada, or the United Kingdom, a clear and concise contract can also reduce the risk associated with scattershot oral argumentation, by tying the issues very narrowly to contract validity and enforcement.

Lowering Risks and Costs

Another major benefit of a contract, which directly impacts the bottom line, is the reduction of costs. A good contract will specify what costs a party is willing to incur, and which risks they are willing to accept. Liability limitation and mutual indemnification (i.e. requiring a party to compensate the other for damages incurred due to negligence) clauses can go a long way in preventing and reducing unanticipated risks and costs. In addition, clear explanations of the scope of services, and the resources a party will or is required to allocate for a project, will help a party keep their costs planned and manageable. In a volatile modern day economy, this kind of planning can be the difference between making it, or breaking it, in terms of business success.

Legal, Regulatory and Ethics Compliance

Having a well worded contract, which also emphasizes compliance with ethical standards and the rule of law can go a long way towards securing the reputation and preventing any criminal liability of a party involved. For example, many times, a multinational company will engage with firms from emerging economies who may, due to the nature of their business or loose business practices, engage in the giving or taking of bribes. If these companies have operations in the United States, they can be held liable under the Foreign Corrupt Practices Act, and face large fines. In addition, many GCC countries, such as the UAE, Saudi Arabia and Bahrain, have also implemented strict anti-corruption measures by law and public policy.

As such, clearly documenting your compliance requirements in a contract could save you from criminal liability if you implement these requirements with your partners in good faith. Without them, the possibility of liability by association could arise, in that a government authority may decide to investigate a contracting party and even hold them accountable, for dealing with a corrupt partner.

How can you help yourself?

For simple transactions which are not technical in nature, the basic rule is to document everything in writing, and make sure the agreement is signed between the parties. One can also access a variety of templates online which may be of assistance.

However, for long term business and more technical issues, the use of competent counsel is always recommended. Many business deals are concluded with the phrase “I’ll have my lawyer draw up the paperwork in the morning,” and this is for good reasons. Experienced contract lawyers have the knowledge to ensure that your business deals are sustainable, profitable, less risky and legally compliant. As such, they can be an invaluable tool to your business.

If you are having any trouble with finding affordable or competent representation to assist you with your contractual needs, Borderless Counsel can connect you with qualified consultants who charge reasonable and tailored rates, to support your budget and requirements.

For more info, get in touch at: zakir@infinigence.net